Your 401k Can Help Fund Emergencies (As A Last Resort)

With a lot of financial chaos swirling around families today, there is often a need for cash that goes beyond family loans or your savings account. However, if you have been steady about saving for retirement, your 401k can be a resource. Depending on the nature of your financial emergency, you may be able to borrow from yourself. There are different ways to access money from your retirement account. Generally, people will take a loan against the amount they have saved or cash out the 401k completely.

Borrowing From A 401k

You can elect to borrow from your 401k to help pay bills when in financial distress or due to medical reasons (called a 401k hardship withdrawal). You are required to pay back the loan to yourself but will be taxed twice in the process. Since the payback money is not considered to be a 401k contribution but a loan repayment, you are taxed when you withdraw the money and you are taxed as you repay the loan. There are also processing fees associated with the loan handling. If you take out a loan against your 401k and leave your job before paying the loan back, you are still required to satisfy the repayment schedule or face further collections. Your employer may also opt to shorten the term of the loan and request payment in full within a smaller time frame.

Borrowing from your 401k is a personal decision when you are in need of money but it may be a better alternative than cashing out your 401k account.

Cashing Out A 401k

Financial advisors note there are a lot of downsides to taking all of your 401k money. The fees, penalties, and taxes associated with early withdrawal may be significant enough that the remaining amount of money in your account is no longer enough to help you out of a financial emergency. Additionally, many people forget the purpose of a 401k account and the importance of saving for retirement regardless of their current age. There is also the possibility that your employer does not provide the option of cashing out early. Those who transfer jobs are advised to continue maintaining the 401k account or rolling it over into the employees new job or into an IRA account instead of taking the money.

If you are in serious need of cash and have a plan to pay back the money, a loan against your 401k might help to improve your financial situation temporarily. If you are looking to cash out your account, take time to seriously consider how much more that amount of money will mean to you in the future when you are ready to stop working in your retirement years.